McKinsey Quarterly recently published an article on the results of its study of economic profit for 3,000 large companies. If you prefer, a narrated slideshow
discussing the results is also available. As a quick review, economic
profit is also known as Economic Value Added (EVA) and is similar to an
NPV calculation for the company as a whole. The results of the study
show the disparities between the top and bottom performers from
middle-of-the-pack companies. Surprisingly, bottom performers tend to
have higher revenues than middling performers, have the highest
tangible-capital ratio, but the lowest asset turnover. They are likely
to be in a capital intensive industry such as airlines, electric
utilities, and railroads. Top performers tend to have high margins and a
low tangible-capital ratio.
Interestingly, top
performers were likely to remain as such, in part due to more fresh
capital. In other words, they stay on top because they get bigger and
seem to invest in profitable projects. Of course, a company can improve
its performance, but much of the improvement lies in the industry. In
fact, companies that do improve (or experience a decline) in economic
profit tend to be driven by industry performance. The results of the
study indicate that as much as 54 percent of a company's economic profit
is due to its industry. Interestingly though, top quintile companies rely the least on industry effects.
